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Friday, 13 January 2017

(The Star) RHB Research: Possible re-rating for Paramount Corp

PETALING JAYA: RHB Research sees a possible re-rating for Paramount Corp Bhd given that earnings contribution from the education division will be more significant after the acquisition of REAL Education Group Sdn Bhd.

It noted that the segment is more sustainable compared with the lumpy earnings from property development.

RHB Research said that the acquisition was reasonably priced compared with other education stocks that were trading on the stock exchange.

“The deal values REAL Education at 18.9 times financial year 2016’s (FY16) earnings – rather reasonable, as some education/education-related stocks such as SEG International and Sasbadi are currently trading at 39 times and 26 times price to earnings ratio,” it said.

RHB noted that the founders of REAL Education wanted to stay on and sustain their remaining stake in the company to continue driving the business. “Paramount’s CEO Jeffrey Chew explained that the owners – Sim Quan Seng, Aziz Bin Bahaman, Ee Ching Wah and Kee Keok Kay – would like to retain the remaining 34% stake so that they could continue to ride on the future growth of the business,” it said.

RHB said that the instant exposure Paramount gets from this exposure would see its market position in the education industry being strengthened significantly, as the total student population would jump to 26,980 from 9,093.

“It would take a much longer time if the company were to start and grow its business in these segments from scratch. Also, it would likely be unaffected by the overlap in the primary and secondary school segments, as the target markets are different (tuition fees from REAL are 20%-30% lower than those of Sri KDU). It will be the biggest K-12 operator in Malaysia, with almost 6,600 students in this segment,” it said.

RHB said it expected REAL’s net profit to grow 8% to 10% per annum over the next two years, which is slightly more conservative than management’s guidance of “double-digit growth”.

“The company plans to fund 80% of the consideration with borrowings, i.e: RM146mil at an interest rate of about 5%. As the transaction will only be completed in 2Q17, we raise our earnings forecast slightly by 4% for FY17 and 8% FY18. Net gearing is estimated to rise to 55%-60% (from 46% in the third quarter) post acquisition,” it said.

RHB Research said it liked the acquisition with the reasonable valuations and the potential synergies that REAL can bring in.

“We also do not rule out the possibility that the acquisition could be part of management’s plan to monetise the education business over the medium term. The CEO also indicated that the asset-light strategy for the education division remains unchanged. We still expect some education campuses to be disposed of in the coming quarters,” it said. It maintained its “buy” call on the company based on a 20% holding company discount and an sum-of-parts based target price to RM2.24 based on a 55% discount to revalued net asset valuation for the property division.